Bankruptcy and Your Money
Then again, the demographics of the average bankruptcy case don't reveal destitute circumstances. A Forbes article pointed out that the average bankruptcy filer is in his or her 30s, possesses a yearly income of $40,000, and has about one year of college education. Therefore, it's conceivable that some - certainly not all - filers actually have substantial home and retirement assets at stake when seeking Chapter 7 protection. Ironically, this shelter may not be what it seems. Here's why -
Loans become tougher and more expensive to obtain - A Chapter 7 bankruptcy generally stays on a debtor's credit report for 10 years. For a Chapter 13 the period is seven years. During this period, it will be extremely difficult to obtain new credit or to take a new loan.
Car loans and mortgages carry a similar burden for the bankrupt debtor. Vehicle loans may be obtained from a few dealers by putting a large percentage of the price down in cash.
Mortgages granted to bankruptcy filers tend to carry much higher rates than conventional mortgages, and may require down payments of up to 50%. Often these debtors are considered subprime (higher-risk) borrowers, and must accept interest rates of up to 5% above those offered to borrowers with better credit histories.
Not all debts are erasable, or all assets protected - Under any bankruptcy filing - including Chapter 7 - some debts cannot be erased, including most taxes, alimony and child support, student loans, and certain property settlements. Other non-erasable debts can include those resulting from fraud, willful or malicious injury, certain fines or penalties, and driving under the influence of alcohol or drugs. And, no bankruptcy permits a debtor to keep property that's considered security for a loan (such as a home for a mortgage) without making payments on the loan.
When filing under Chapter 7, the decision about which assets are exempted from sell-off by the courts can vary widely. For example, some states permit Chapter 7 filings under either state or federal law, and federal law exempts home equity of up to $16,100. Yet, this limit is $100,000 under Massachusetts law, and only $8,000 in Missouri.
Chapter 7 doesn't protect all retirement account assets - Though all qualified retirement plans (such as 401(k)s) are always exempt, the same isn't always true for other retirement account assets, including individual retirement accounts (IRAs).
For instance, IRA assets are fully protected under Illinois bankruptcy law,
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